This diary is an extended comment on "Harvard's Mankiw – A Disgrace To the Economics Profession", a diary from Letsgetitdone. And that diary is a repost of an article in which Warren Mosler rightfully criticizes N. Gregory Mankiw
Mosler however, falls into the same trap as many other insightful people. He has a brilliant insight and tries to fit it to all points and curves in the universe. He and Galbraith and others are correct concerning Modern Monetary Theory (MMT) or more directly how fiat money actually works. But because of the religious orthodoxy of both the neoclassical nincompoops and the Keynesians and the failure of these religious organizations to examine the real world, all sorts of outlandish claims and fittings are used in an attempt to penetrate the iron helmet of doctrinaire thought. This is a serious diary for rational people that wish to rise above the kabuki clown act unfolding in the nation's capital. You must actually THINK.
In our first installment we examine the opening salvo from Mankiw the liar and the retort from Mosler the "new guy".
It’s 2026, and the Debt Is Due
By N. Gregory Mankiw
March 26 (NYT)
The following is a presidential address to the nation — to be delivered in March 2026.
My fellow Americans, I come to you today with a heavy heart. We have a crisis on our hands. It is one of our own making. And it is one that leaves us with no good choices.
For many years, our nation’s government has lived beyond its means.
A rookie, first year student mistake. Our real means are everything we can produce at full employment domestically plus whatever the rest of the world wants to net send us. The currency is the means for achieving this. Dollars are purely nominal and not the real resources.
This isn't a mistake and Mankiw isn't a rookie. He is firstly a hard core right winger who believes that rich people are rich because God (or the great pumpkin) wants it that way. And as such the rich are owed allegiance above all else and all others. Conservative economics is built on this unbridled respect for accumulated wealth and power. With the true conservative, blood lines of inherited wealth are more respectable than latter day earned wealth. But the latter day Republican genre deviates in that it brings a great respect for guile. In any event, the present and the future are sacrificed in opulent displays of respect for the owner class because respect must always trump any privilege earned in the here and now. Most certainly the current owners must be honored before any designs for the future can proceed. The "Gawd Almighty Dollar" is to be respected because it gives the holders of dollars total power over the society. Any attempt to weaken this godhead or to question the legitimacy and rightful power of money holders is sacrosanct. IMHO the base reason for the Iraq war and the Housing bubble was to destroy the American government through a massive transfer of financial wealth and power to the PRIVATE controllers of money. The holders of T-bonds and mortgages and financial stocks are "the rich". The rest of us now owe them and they will be using government to enforce those contracts. Mankiw is not making any mistake. He is a deadly serious fascist Republican dressed up as an economist.
Mosler is correct in his observations concerning the role of fiat money in a rational world. But being correct and rational doesn't count for much when the respected "authorities" lie and the politicians are constantly in a real life kabuki theater with the theme of a the falling sky. The educational system has been overrun and the channels of information co-opted by the wealthy and powerful. Truth and reality are set aside in the all out effort to maintain the private money hucksters and their wealthy and powerful benefactors. Mankiw is correct concerning government living beyond its means. But what was and is "beyond the means" is the imperialism, the tax cuts, and the general coddling of "the rich".
Consider that it is the worldwide force of imperial government that protects the intellectual property rights of global corporations that allows global trade. This same force of law provides for the very concept of ownership. Yet these "owners" do not pay for that force. The rich used the tax cuts to invest in offshore assets and the offshore enablers then invested the money in T-Bonds. We should have massive dollar devaluation because of this war making and tax cutting and the failure to produce goods here in the USA but we don't. This is BECAUSE the money was borrowed instead of printed, thus creating an IOU to the people who fomented the imperialism. And so long as the rich have all the money (and the bonds) then there will be no devaluation of the currency. They will simply sit on the money and the bonds and hope the economy gets even worse. Republican heaven is when the people are at the gates of the mansion begging for a crust of bread. A modern day "New Deal" is possible when and if the voting public can be made more aware of the true nature of money and the fact that government DEFINES money. When all of the money and power are held by few hands that are in control of government, the only solution is to devalue that money in relation to land and labor and productivity. It is still possible to do this, but it is getting quite late. Only government has the power to enforce contracts denominated in government's unit of account. As such, government cannot ever go broke. But people can be foolish enough to allow some other form of government to replace representative democracy.
We have promised ourselves both low taxes and a generous social safety net. But we have not faced the hard reality of budget arithmetic.
The hard reality is that for a given size government, there is a ‘right level’ of taxes that corresponds with full domestic employment, with the size of any federal deficit a reflection of net world dollar savings desires.
Here Mosler hits the nail firmly on the head while Mankiw attempts to use dated micro-economic tap dancing on a macro/monetary problem. The total amount of fiat money is regulated by government spending versus taxation. Money and bonds are both MONEY. Government creates money by deficit spending and if the amount of deficit spending outruns the ability of the economy to service the spending at full employment then monetary devaluation SHOULD occur. But for the interest bearing nature of the bonds, it will matter not whether this MONEY exists as bank balances (reserves) or as T-bonds. As we write, QE2 is converting $600B in T-bonds to liquid Federal Reserve notes (reserves). After conversion, the amount of fiat money remains the same. Only the liquidity changes. And we will need a lot more QE because the national government has been taken over by wakos. There will be no appropriate fiscal policy and Citizens United simply added to the problem.
But as to the microeconomic discussion:
Taxation SHOULD be used to tune the economy and keep it operating in good order. Monetary policy alone (or the broad level of general taxation) is a blunt instrument. And free markets operating within such a system seem to produce monopolies as opposed to competing firms. "Too big to fail" should be addressed by a flat asset tax or a progressive income tax. Such taxation limits the size or organizations and the wealth of individuals in such a way as to prevent authoritarianism. The "shape" of the tax system; what and who is taxed and how the taxes are applied can be just as important as monetary policies and the general tax level. When taxes are discussed as a monolith, the taxes become a monetary tool as opposed to a fiscal tool.
What government spends on is also a shaping tool. And the prosperity of the vast middle class (which is the only valid measure of "good" political economy) should forever be the goal of tax policy and spending. e.g Do we buy more imperialism to help the rich or more infrastructure to aid the middle class? But again, Mosler is correct as far as he goes; as far as the macro effects of fiat money are concerned, borrowing is not the key to a successful economy.
"Political economy, considered as a branch of the science of statesman or legislator, proposes two distinct objects: first, to provide a plentiful revenue or subsistence for the people, or more properly to enable them to provide such a revenue or subsistence for themselves; and secondly, to supply the state or commonwealth with a revenue sufficient for the public services. It proposes to enrich both the people and the sovereign." -- Adam Smith
The seeds of this crisis were planted long ago, by previous generations. Our parents and grandparents had noble aims. They saw poverty among the elderly and created Social Security.
Yes, they decided they would like our elderly to be able to enjoy at least a minimum level of consumption of goods and services that made us all proud to be Americans.
Social Security is not now, has not been, and should never be the cause of deficits. And deficits should reflect the need for additional money in the economic system and the desire of private entities to "save". The OFF BUDGET Social Security system at this moment is using a small amount of interest income from the trust funds (built by previous FICA tax surpluses) to augment current FICA revenues. The CURRENT cash flow problem manifests due to the recession (unemployment) and not due to any any long term projected gap. So Makiw is lying as he is prone to do. We PAID into the SS system just like we pay into a life insurance policy. And when the insured "event" happens we collect the benefits. And yes, darlings, old age is a debilitating event just as sure as death. FICA tax is an insurance premium in that all of the money paid is eventually paid out to beneficiaries. It is NOT (like general tax revenue) consumed by government for the purpose of building infrastructure or war machines. Nor is it used to pay the police and the courts and the prisons or any other general government expense. That is why SS is OFF BUDGET. It is not a "consumed tax". It has nothing to do with the fiscal budget at all.
They saw sickness and created Medicare and Medicaid. They saw Americans struggle to afford health insurance and embraced health care reform with subsidies for middle-class families.
Yes, they elected to make sure everyone had at least a minimum level of actual health care services.
The "Medicare Mess" is what happens when you allow government to be unaccountable; when you don't take insurance systems OFF BUDGET and fund them appropriately as true insurance systems. The Republican lying pigs and their lip syncing "economists" will mix the general tax revenue and general government services into the social insurance system and claim that imperialism and tax cutting are not the cause of government fiscal shortcomings and that social insurance is. The proper FIX for Medicare and Medicaid is to take these systems OFF BUDGET, just as Social Security is off budget, by replacing the income tax share for seniors and the disabled with distinct Medicare taxes that are just as progressive as the income tax if not more so. Here again, Medicare is an insurance system and not a general government service. All of the money is paid out as benefits and government does not consume the funds. The only point at issue is whether open public systems of insurance are more accountable, effective, and efficient than private, for profit, systems. Social Security is a wonderful example showing the efficacy of government run insurance. This is why there is an all out attack on Social Security at all times from the lying pig Republicans. There is also a synthesis of Medicare, and the ACA that will save Medicare as we know it. That synthesis is the Medicare Buy In system that offers better health insurance rates to people under 65 while providing a subsidy to the elderly. The current Republican lying about the budget at the national level is the same as the Wisconsin Republican lying about collective bargaining being part of the Wisconsin budget.
But this expansion in government did not come cheap. Government spending has taken up an increasing share of our national income.
The real cost of this ‘expansion’ (which was more of a reorganization than an expansion of actual real resources consumed by the elderly and consumed by actual health care needs) may have consumed an increasing share of real GDP, but with continued productivity this would have been at most a trivial amount at current rates of expansion.
Here again, Mankiw is mixing some truth with his general lie and Mosler is failing to call him out as they talk past one another. Mosler is "rightfully consumed" by MMT because he is a small voice compared to the legions of liars and traditionalists arrayed against him. He MUST employ every opportunity to illustrate the political economic facts of fiat money itself in the current "gold bug" world. Mankiw is obsessed with retaining the religious affliction concerning the money godhead and the religious devotion to money as having intrinsic value outside of law and contract enforcement (government). The real world tells us that money is what the guys with the swords will take as opposed to taking your chickens; or as in the case of the Conquistadors, what they will take as opposed to taking off one of your arms or taking your very life. In the case of the bank, it is what the bank will take as opposed to taking your car or your home (by force of law). We can use all sorts or crap to trade amongst ourselves. But money is what the sovereign authority says it is. The disagreement we are currently having is over sovereignty. Are the banksters sovereign or is the elected government sovereign. The socially beneficial answer to this is clear to most people with an IQ over room temperature. The banksters cannot enforce their own contracts. Only government can enforce contracts. But in Republican heaven, the banks and the moneyed class own the government and the government works on their behalf, creating money as they wish and bombing those who might disagree. MMT is a counter to that idiotology. It recognizes a representative government that has full control over the unit of account. In such a system oligarchy and harmful monopoly is much less a problem. Especially if the educational system provides a full discussion of money and monetary systems.
In this particular instance Mosler is again correct in recognizing that social insurance systems are best managed by an open government that cannot go bankrupt in the traditional sense. This is most certainly true with regard to pensions. The pension funds in the private sector and in state governments are constantly being looted under the guise of "austerity" or "bankruptcy". The point regarding insurance in general is that unlike the private insurance business where the "books" on actuarial data are a trade secret, the statistics, the costs, and the methods of federalized insurance are all open to the public. There is no "national security" or "competitive intellectual property" involved. And because of that, there is no way to defraud the policy holders; no need for secret data in the interest of profit. Mosler correctly states that moving the social insurance function into government and out of the private sector makes economic sense. Any increase in the supposed "size" of government and any threat to personal freedom is a conjured up boogerman. It all hinges on transparency. And in the case of insurance (which is merely an actuarial exercise) the public servants inevitably win this hands down. A public insurance system is more open, accountable, and effective. Observing the blessings of MMT (no bankruptcy threat) there is no way that such a system can ever fail to pay benefits where the vast majority believe those benefits worthy and are willing to pay the premiums. Realistically, the benefits will always be paid based on the will of the society and the control of the budget and tax systems (a budget for each broad category). The function of budget and tax systems is to define the limits of payment and WHO pays in the normal course of events. If "shit happens" then the cause of the "shit" is taxed after the fact. Wild ass "shit" is addressed by created money and the tax system (that would be the elected representative government people) decides who or what caused it so as to tax appropriately (to repay the loan advanced to cover the event). Most "events" such as old age and illness are foreseeable on an actuarial basis and the loan process can be very structured and managed very well. Real INSURANCE is not a gamble or a game. And insurance has no adverse effect on the entrepreneurial economy. People still seek their fortunes and earn their privileges.
Today, most of the large baby-boom generation is retired. They are no longer working and paying taxes, but they are eligible for the many government benefits we offer the elderly.
Yes, they are consuming real goods and services produced by others. The important consideration here is the % of the population working and overall productivity which he doesn’t even begin to address.
Our efforts to control health care costs have failed. We must now acknowledge that rising costs are driven largely by technological advances in saving lives. These advances are welcome, but they are expensive nonetheless.
Still no indication of what % of real GDP he envisions going to health care and real consumption by the elderly.
Mankiw offes another truth in that efforts to control health care costs through the use of private sector insurance have failed just as he says. In its original intent, Medicare had no cost control objective. But it should be noted that in the here and now some physicians are refusing to become part of the Medicare system because the system does not pay the rates that private insurance companies will pay. To claim that Medicare is the cause of the problem is typical Republican looking glass mentality. If people are ALLOWED to pay straight up premiums to a national Medicare insurance company as opposed to the private insurance companies then the vast majority of the people will opt to pay the lower rates of Medicare insurance. And when that happens we will have cost control. It is a straight forward proposition: If the physicians and the pharmaceutical companies don't want to take up basket weaving then they will have to serve the large Medicare consumers group. For the "union" and "solidarity" people we can call the Medicare consumers a UNION.
If we had chosen to tax ourselves to pay for this spending, our current problems could have been avoided. But no one likes paying taxes. Taxes not only take money out of our pockets, but they also distort incentives and reduce economic growth. So, instead, we borrowed increasing amounts to pay for these programs.
At least he gives real economic growth a passing mention. However, what he seems to continuously miss is that real output is THE issue. Right now, with potential employment perhaps 20% higher than it currently is, the lost real output, which compounds continuously, plus the real costs of unemployment -- deterioration of human capital, broken families and communities, deterioration of real property, foregone investment, etc. etc. etc.- are far higher than the real resources consumed by the elderly and actual health care delivery. Nor does he understand what is meant by the term Federal borrowing -- that it’s nothing more than the shift of dollar balances from reserve accounts at the Fed to securities accounts at the Fed. And that repayment is nothing more than shifting dollar balances from securities accounts at the Fed to reserve accounts at the Fed. No grandchildren involved!!!
Mankiw again assigns the meanings of the words to fit into his idiotology. And if you can create the language of the discussion and the metrics then you can't fail to prove any point you wish. Economic growth SHOULD BE the growth in the desired leisure of the vast majority. There is no other definition that would fit the word "good" in the field of political economy.
Attempt at clarification::
If all persons are fully employed at 60 hours a week and the number of sports stadiums, nuclear warheads, and skyscrapers is huge then the GDP will be very large indeed. It is the same thing as measuring the ancient Egyptian economy by the number and size of the pyramids. The vast majority of the people were not well served. But the Republican kings were very happy with it.
And as to whether we chose to tax ourselves, the SS trust fund calls Mankiw a liar.
Again, Moser is correct but missing the real point that Mankiw also misses: At the micro econ level writ large, in any and all civilizations the productive middle cares for the unproductive young and the unproductive old. No matter how you keep the books, that reality remains. The true conservatives wish to control the conduct of the productive segment via forced individual savings based on threats of an abbreviated life span. If you are not smart enough to screw your neighbors out of their money then you die for lack of medical care or in old age due to simple infirmity and poverty. Of course, the fact that some of the contenders start the game with shit loads of money from the past is the mark of God on those particular participants. It is typically hypocritic Republican, this rejection of Darwinism in nature and the embrace of it in political economy.
Yet debt does not avoid hard choices. It only delays them. After last week’s events in the bond market, it is clear that further delay is no longer possible. The day of reckoning is here.
This morning, the Treasury Department released a detailed report about the nature of the problem. To put it most simply, the bond market no longer trusts us.
For years, the United States government borrowed on good terms. Investors both at home and abroad were confident that we would honor our debts. They were sure that when the time came, we would do the right thing and bring spending and taxes into line.
But over the last several years, as the ratio of our debt to gross domestic product reached ever-higher levels, investors started getting nervous. They demanded higher interest rates to compensate for the perceived risk.
This is all entirely inapplicable. It applies only to fixed exchange rate regimes, such as a gold standard, and not to non convertible currency/floating exchange rate regimes. This is nothing more than another rookie blunder.
Higher interest rates increased the cost of servicing our debt, adding to the upward pressure on spending. We found ourselves in a vicious circle of rising budget deficits and falling investor confidence.
With our non convertible dollar and a floating exchange rate, the Fed currently sets short term interest rates by voice vote, and the term structure of interest rates for the most part anticipates the Fed’s reaction function and future Fed votes. Nor is there any operational imperative for the US Government to offer longer term liabilities, such as 5 year, 7 year, 10 year, and 30 year US Treasury securities for sale, which serve to drive up long rates at levels higher than otherwise. That too is a practice left over from gold standard days that’s no longer applicable.
Mankiw is not even a conservative. He wants desperately to reward the financial con artists that create money in Wall Street banks and loan this to the government. It is bad enough when the Republicans want to pay "interest" (actually economic rent) to geezers that save tin foil and balls of string in order to capture the economy and hold it hostage. or to reward the offspring of such geezers. But paying rent to a bunch of hucksters that create money from thin air is what Mankiw is into here.
As economists often remind us, crises take longer to arrive than you think, but then they happen much faster than you could have imagined. Last week, when the Treasury tried to auction its most recent issue of government bonds, almost no one was buying. The private market will lend us no more. Our national credit card has been rejected.
As above, the US Government is under no operational imperative to issue Treasury securities. US Government spending is not, operationally, constrained by revenues. At the point of all US govt spending, all that happens is the Fed, which is controlled by Congress, credits a member bank reserve account on its own books. All US Government spending is simply a matter of data entry on the US Governments own books. Any restrictions on the US government’s ability to make timely payment of dollars are necessarily self imposed, and in no case external.
So where do we go from here?
WE DON’T GET ‘HERE’- THERE IS NO SUCH PLACE!!!
Wrongo, Mr. Mosler: We are "here" right now. The reality is that the other sovereignties are finding that American dollars do not garner the respect that they did 30 years ago. This has very much to do with "finance" and with the lack of American production. The goods coming out of China are not produced by American Bankers. They are produced by Chinese and the financial weenies in the US take the gravy in the form of US dollars. Those dollars are becoming worth less and less as the rest of the world realizes that US bankers are not producing anything at all. This is not a disaster. It is a harbinger of the reincarnation of American manufacturing and American technology. It is also a new beginning in energy. We cannot compete for the oil resource and we do not have the oil ourselves. Coal or nuclear are the primary next step and coal is not going to cut it. There is also solar and wind and biofuels all of which will be very competitive in the new order of American dollar demise. That demise is not caused by government spending. It is caused by financial blood suckers and the failure of government to spend ENOUGH on education and innovation. The stupidity of long term debt and cuts to education and science are what is killing America. The solution is not to quit spending in government, but to spend wisely and to tax the financial blood suckers who got us here. Whereas, the FED created between 8.5 and 11 TRILLION dollars to bail out the Republican version of capitalism, than we should be asking ourselves why the INTEREST on that loan isn't being paid. By my reckoning it amounts to about $200B per year that Wall Street banks should be paying to the FED and that the FED should be forwarding to the US Treasury. The TARP was the backing for this money in a fractional reserve system. Where are our EARNINGS from this loan????
Yesterday, I returned from a meeting at the International Monetary Fund in its new headquarters in Beijing. I am pleased to report some good news. I have managed to secure from the I.M.F. a temporary line of credit to help us through this crisis.
This loan comes with some conditions. As your president, I have to be frank: I don’t like them, and neither will you. But, under the circumstances, accepting these conditions is our only choice.
Mankiw’s display of ignorance and absurdities continues to compound geometrically.
We have to cut Social Security immediately, especially for higher-income beneficiaries. Social Security will still keep the elderly out of poverty, but just barely.
We have to limit Medicare and Medicaid. These programs will still provide basic health care, but they will no longer cover many expensive treatments. Individuals will have to pay for these treatments on their own or, sadly, do without.
We have to cut health insurance subsidies to middle-income families. Health insurance will be less a right of citizenship and more a personal responsibility.
We have to eliminate inessential government functions, like subsidies for farming, ethanol production, public broadcasting, energy conservation and trade promotion.
The only reason we would ever be ‘forced’ to make those cuts would be real resource constraints- actual shortages of land, housing, food, drugs, labor, clothing, energy, etc. etc. And yes, that could indeed happen. Those are the real issues facing us. But Mankiw is so lost in his errant understanding of actual monetary operations he doesn’t even begin to get to where he should have started.
We will raise taxes on all but the poorest Americans. We will do this primarily by broadening the tax base, eliminating deductions for mortgage interest and state and local taxes. Employer-provided health insurance will hereafter be taxable compensation.
He fails to recognize that federal taxes function to regulate aggregate demand, and not to raise revenue per se, again showing a complete lack of understanding of current monetary arrangements.
We will increase the gasoline tax by $2 a gallon. This will not only increase revenue, but will also address various social ills, from global climate change to local traffic congestion.
Ok, finally, apart from the revenue error, he’s got the rest of it sort of right, except he left out the part about that tax being highly regressive.
Here, Mosler makes yet another microeconomic error. Rebated energy taxation is not regressive at all, and if government services are truly to promote the general welfare then the rebates can be in services as opposed to being in cash. If we assume cash(for an example) and that the income tax system remains much like it is and all the money collected from gasoline taxes is rebated as an egalitarian citizens dividend then those who conserve energy will benefit and those who waste it will be punished. There will be a lot more car pooling and a lot more mass transit riders and the gas guzzlers will pay through the nose while the bus riders get a new pair of shoes.
As I have said, these changes are repellant to me. When you elected me, I promised to preserve the social safety net. I assured you that the budget deficit could be fixed by eliminating waste, fraud and abuse, and by increasing taxes on only the richest Americans. But now we have little choice in the matter.
Due entirely to ignorance of actual monetary operations.
If only we had faced up to this problem a generation ago. The choices then would not have been easy, but they would have been less draconian than the sudden, nonnegotiable demands we now face. Americans would have come to rely less on government and more on themselves, and so would be better prepared today.
What I wouldn’t give for a chance to go back and change the past. But what is done is done. Americans have faced hardship and adversity before, and we have triumphed. Working together, we can make the sacrifices it takes so our children and grandchildren will enjoy a more prosperous future.
N. Gregory Mankiw is a professor of economics at Harvard.
The fact that Mankiw is a professor of economics should give us pause when we think of the people being "educated" in the economics departments of the current universities. The takeover of economics in the universities started in earnest in the 1970's with the onslaught of the Austrian persuasion. The entire basis is crap. The assumption was/is that wealthy people become wealthy and stay wealthy only by supplying what the population wants. That was a lie in the 1970's and it is even more of a lie today. The extremely wealthy are rent takers in all ways and will not allow progress unless they are paid their pound of flesh (rent).